Capitalizing on ECB policy easing with options spreads

With the ECB signaling there could be more policy easing in the future, the market reacted by breaking the Euro currency future’s (CME:E6Z13) win streak and sending prices lower by 0.70%. The announcement also sent the Euro sharply lower against the Yen. The move lower ended the bull run from the previous week as the ECB announced their consideration of a plan that would lower benchmark rates in the Eurozone to -0.1% with the intention of increasing lending and spurring the still sluggish economy.

Although it seems clear that the trend of continuing easy policy will continue in the Eurozone, it might not be time to short the Euro just yet. Comments made by ECB President Mario Draghi regarding the possibility of negative rates contributed to a slight rebound in the Euro the day after the ECB announcement. Draghi’s comments made clear he has some concerns over the long term effect of low rates but also reiterated that the central bank was ready to cut rates again if that’s what was necessary.

Even with Draghi’s comments, it still seems like the path of least resistance for the Euro is down. The uncertainty surrounding the future of the policy simply means we must look at a trade with low risk and high reward potential.

So what are the ways a trader can speculate on easy policy in Europe and a lower Euro?

Trading spot EUR/USD. This is the most direct way to take a speculative view on the euro, but can be capital intensive and would require a trader to take on a lot of risk when taking a medium- to long-term view.

Trade the ETF. The CurrencyShares Euro Trust (FXE) tracks the price of the euro very well, but is the most capital intensive way to trade the euro. The risk required to take a long-term trade is also high.

Euro futures and options on futures. Provides leverage while still allowing a trader to set up a well-defined risk vs. reward setup.

Knowing we want to use Euro futures and options, we can now use the options market to develop a price target and set up a trade. The options market is currently implying a move of 0.0350 in Euro futures by February expiration. Using this implied move we can calculate a downside target of 1.315 and set up an options trade.

About the Author

James Ramelli is the Moderator of the Live Futures Options Trading Room at KeeneOnTheMarket.com where he actively trades futures and options on futures while educating members on strategies, setups and risk management. He has a degree in Finance with a focus in Derivatives Trading and Financial Engineering from The University of Illinois and has been trading for five years. James appears regularly on Bloomberg T.V. and BNN and writes a weekly column for Futures Magazine.